Goldman: ‘Sell Bonds And Buy Stocks’

By Teresa Rivas

Goldman Sachs’ David Kostin and his team have a note out today, arguing that investors should stick with equities over bonds. Whether traders looking for a quick buck or investors in it for the long haul, stocks are the way to go, writes Kostin, as bonds will likely be worth less in the future while stocks are trading reasonably, and should see a boost from rising earnings and dividends.

“Simply put, bond market participants own an asset that is just beginning to unwind after a 30-year bull market while equity investors have the opportunity to buy the US stock market at a price close to our estimate of fair value,” he writes.

Goldman expects Ten-year U.S. Treasury yields to rise to 2.5% at the end of the year, ultimately reaching 3.75% by the end of 2016. Kostin notes that recent market actions, in which yields have risen, support his thesis.

From the note:

We expect US equities will deliver positive returns during the next several years at the same time interest rates are rising and bond prices are falling. In our July 2012 report Forecasting long-term returns for US equities we argued that stocks had a greater than 95% probability of outperforming bonds and inflation during the next decade.

We forecast the S&P 500 index will rise by roughly 10% during the balance of 2013, another 9% in 2014, and 11% in 2015. The key driver of higher equity prices will be earnings growth which we expect will equal $108 in 2013, and rise to $116, $124, and $131 in 2014, 2015, and 2016, respectively (see Exhibit 8). Our market and sector-level earnings models incorporate US GDP, world GDP, inflation, interest rates, oil, and US Dollar forecasts.

We forecast S&P 500 dividends will rise by 11% in 2013, 10% in 2014, 9% in 2015 and 4% in 2016. We estimate the dividend payout ratio will remain essentially constant during the next few years, increasing from 32% in 2013 to 33% by 2016.

As for specific sectors, Kostin recommends investors to stay overweight financials and industrials, while underweighting health care and consumer staples.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.